I'm Barry Minkow, president of ZZZZ Best Carpet Cleaning. Your carpets deserve the care and expertise of our licensed, bonded, and insured technicians. So call now. I'll guarantee the work and the price, in writing. Narrator: At the age of 16, Barry Minkow started a carpet cleaning service in his garage. It never made a legitimate profit so he decided to cook the books. Within 5 years, his scheme had unraveled and he was sentenced to 25 years in prison for defrauding investors of over $100,000,000. BM: Well, basically the fraud was we had a carpet, furniture, and drapery cleaning that was legitimate. We owed a lot of money to a lot of people, borrowed to expand on the way up. I couldn't get bank loans a lot very easily and I got caught up in usurous loans, borrowed from Peter to pay Paul. In the process of getting caught in those usurous loans, I got myself in debt and began to perpetrate a restoration fraud, a fraud that would say I'm making more money than I'm making and I need to borrow more money than I would need to borrow if my company were legitimate. So I needed what we call a built in excuse. Why are you always short of money? I got these restoration jobs. And I had to fool accountants and auditors into believing that those numbers were real before I could perpetrate that fraud. No one loans money to a company that's losing money so I had to be profitable in the process of needing money. So all that was the crux and the foundation for the fraud. What I did was I created false vendors, like Marbil Marketing or Tuftex and created invoices and created literal front companies who I could show money going to. Well, accounts receivable are a wonderful thing. They are a tool that is used by a fraudster like me to ask to borrow money mainly and show earnings. So I can borrow money, hey, look at these receivables and I could show earnings because once you book the receivable, you're already accounting for the income and you're showing earnings. So what I need to do is create a receivable and because I had this company that we were doing these insurance frauds from and I had their letterhead, I could make up any letter and any invoice saying that they owed me money for doing this job. I could take some checks from the past and say that they were supplies from the job and I could piecemeal it together, the detail stuff along the way. Bingo. I have a receivable. You take the checkbook of the phony setup company, "Interstate Appraisal Services." So you have an invoice, 7727, $300,000, net 60. You got a check that says 7727, "job well done." The check's there, here's the check and I tie in a $300,000 deposit off the bank statement that was deposited on the same day that check dates, there's the deposit, really the deposit was to do a kite, but it tied together so nicely, what do they know? You know the restoration business was maybe 80% of the income that I earned, allegedly but 80% of the due diligence that I tried to get the auditors and the lawyers to look at was the carpet cleaning end of the business which was legitimate. I'm going to be nice to those auditors. I had them over for dinner. I went to their houses for dinner. I wanted their wives to know me so if they had a go against me, they had to hear their wives to say "I think he's such a nice boy." I wanted to make sure if they were going to go against me they were going to go against their own wives. Does he want to go back to his clients and the manager and everybody and say they lost the ZZZZ best account because they wanted to be petty? Because they set the ground rules and we abided by them? Do they want to lose the ZZZZ Best account? No, they don't want to lose the ZZZZ Best account and I leveraged that to the hilt, too. So you got to remember something. Yes, want to get to know your client, but you want to remain your objectivity and I believe the auditor's responsibility is to give up the $100,000 a year fee to prevent the sixteen million dollar fraud. If they're going to mail a confirmation to the bank, fine. We don't care what it says our balance is, our average balance is, and how much we owe. That wasn't where the fraud was happening. The fraud was happening with three banks, kiting checks bank and forth, inflating a false balance. The loan payment, heck. If you make a loan payment, you know what's the problem there? There's just no accountability. The auditors are being cheated, I believe, by not getting enough information from them. They doubted the financial wherewithall of ZZZZ Best, I pointed them to the stock price. Although the auditors are not supposed to look at that, you can't ignore a stock that goes from 5 cents to 18 dollars. You know, hey, these are Wall Street analysts. They know due diligence. They know numbers. Don't you think they would have found something out if there was something to be found out? And by having all these people, the media, lawyers, Wall Street, the financial analysts, the stock brokers, all hyped about ZZZZ Best, I basically boxed the accounting firm in a corner and said, you're not going to be the only rotten apple, are you? What are you going to need to satisfy yourself and I'll satisfy you to fill your file. Without putting the pressure on the auditors, you've got to pull yourself away from the numbers and hindsight is wonderful, you know, to look back and everybody says, how could you have been fooled by Barry Minkow? How could anyone have fallen for the old fraudulent building restoration scam? Or an old Ponzi scheme? Well, very easily. The press says I'm gold. The banks said I was gold. I had Hughes, Hubbard, and Reed as my lawyers. I was doing well on Wall Street and I leveraged my auditors. I believe a company that makes a million a year, well, where's the money going to? If he's making a million a year, why is he continuing to lease his equipment? I know the answer will be because he wants to expand and use that money for expansion but that just doesn't make a whole heck of a lot of sense. Either he's reinvesting it in the company or it's going somewhere. Where's that million going to? So highly leveraged owned assets and unbelievable growth. It's very rare. You know, the computer business, perhaps. The software business, maybe, anything else, hardly ever, that you're going to see a 4 million dollar company go to a 40 million dollar company overnight unless it's a fad of some kind. Watch that guy with the big ego. Watch that guy who loves to be on the screen because that's the guy who will do anything to keep his name in the paper and in print. Watch the guy whose stock's going crazy and very high profile because that's the guy that will lie on a 10Q rather than suffer his stock going lower because his earnings were down. Watch that guy. Watch that guy that has no respect for anyone but himself. A fraudulent situation is always in need for money. Yes I know that entrepreneurs are growing businesses out there and they are also in need of money but there's one difference. The fraudulent man has to have that money because he owes someone else or is holding something together and he has to expand and he has to grow because that expansion and growth are excuses for the need of his money. The entrepreneur on the other hand, will have enough business sense to be able to say, maybe growth is not what I need right now because the the finances aren't available. The banks aren't looking at me. I need some more track record. Because his business is real, he can wait a year. 162
00:08:06,400
If somebody said wait a year
to me, I would have been under.
